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After the close tonight, two of the higher-profile names in consumer discretionary print numbers - Nike and Bed, Bath & Beyond. Nike has seemingly dominated my own focus, but don't forget that BBBY is one of our core names that we will consistently revisit at the right price. My colleague Eric Levine is the man on BBBY here, and I thought the following exchange this morning might be useful to you.

Levine: "I'm modeling EPS a couple of cents ahead of the $0.25 Street number.  Guidance was $0.23-$0.24.  Same store sales are tracking in the low-single digits as best as I can tell, which is a sequential improvement from 4Q when they declined by 4.2%.  Upside in the quarter should be driven by the gross margin line which is expected to benefit from a less promotional environment and building benefit from less competition.   Bottom line here is that the quarter should look fairly similar to 4Q in terms of key drivers, which in this case is a slightly negative topline and a better gross margin line. 

McGough: "Wont that be bad in light of BBBY's multiple and what we saw out of BBY last week (when it beat, but on a weaker top line)?"

Levine: "No, I don't think so. Comps at BBY ended up being worse than expected with people focusing on the fact that CC's liquidation didn't have as a big an immediate impact as expected.  My sense is that there is less "hype" built in to BBBY when it comes to Linens and the revenue line.  I still think a sequential improvement in comps with a better gross margin line will be taken positively."

Bottom Line:  Collectively, we like BBBY.Over the next 12-24 months BBBY is a  "mean revision" story, driven by an improving economic backdrop, the elimination of the company's most direct competitor, and the bottoming of the worst period in modern history for home furnishings consumption.  Gross margin recovery is the most overlooked item by the Street and the source of upside over the near and intermediate term.  A more rational promotional environment driven by Linen's absence is key to the story.  Modest square footage growth of 5% coupled with operating margin recovery should drive FCF growth in excess of 15% over the next 2 years.  Cash flow yield remains attractive at 6.1% ('09) and 9.0% ('10) respectively. Multiples are full, so this needs to be an earnings-driven story. The good news is that the Street's numbers are 1-year behind. $0.25-$0.30 beat per Yr1 and Yr2 = $5-$6/yr.


Some Notable Call Outs 

  • Slightly better SportscanINFO numbers last week, but the headline is deceiving. There was a marked improvement in the athletic specialty channel, but additional weakness in mass and family channels. That drop-off is so severe that any sane analytical mind needs to question the validity of the data.
  • Consistent with commentary from other consumable-driven retailers, Kroger highlighted relative strength in its own/private brand products with sales up double-digits. National brands declined slightly for the quarter, albeit at a lesser rate than in 3Q and 4Q. Clearly price sensitivity is driving this trend. Inflation was 3.6% for the quarter, reflecting increases in grocery, drug, general merchandise, nutrition, and deli/bakery. Deflation remains prevalent in produce and dairy. Consumers continue to exhibit cautious shopping patterns as demonstrated by more frequent visits that are resulting in lower average basket sizes. Overall, there have been no measurable changes in the company's performance or the consumer's purchasing habits over the past few months.
  • Over the past year J Crew has joined many other brands by using the "sample sale" as an incremental tool to clear inventory. While reports from consumers have generally been moderately disappointing in terms of quality and price of the merchandise, it is likely that these events have helped to clean up inventory as sales have slowed. The 4th such sample sale is now slated to take place beginning July 12th.
  • In another twist on the sample sale, 20 retailers in Charlotte, NC have pooled their excess inventory to throw one massive sale event later this month. In a normal environment we would never see competitors getting together under one roof!


Zach's overview of items you're unlikely to find in the general press.

  • The Indonesian footwear sector is in a state of euphoria over the fact that prospects of sales in domestic and overseas markets have increased due to a slowdown in imports of Chinese footwear and a rise in demand from the European Union. Sales in the domestic markets have visibly increased since the government clamped down on imports from China by reducing the number the number of ports of entry to crack down on illegal imports, which was hurting the local producers. On the other hand footwear exporters are optimistic of growth in shipments from the country by at least 5% in the second half of 2009, due to a renewal in demand from the overseas markets, mainly the European Union which accounts for 37% of Indonesia's footwear exports. Local manufacturers have been able to increase their market shares by more than 7 percent due to clamp down on imports. Shoe production reached 1.2 billion pairs last year and is dominated by sports shoes which account for about 800 million pairs. Domestic sales touched 235 million pairs, of which 40% were manufactured locally and the rest imported. <http://www.fibre2fashion.com/news/daily-textile-industries-news/newsdetails.aspx?news_id=74089>
  • According to a report, the Russian luxury market is dramatically transforming under the influence of the economic crisis. Stagnation of the Russian economy, devaluation of the national currency, the growth of unemployment, and the falling of purchasing power will reduce value of the Russian apparel market. IndexBox predict consumers' expenditures for luxury apparel, footwear, and accessories will fall 30% in 2009, compared with the same period of the previous year. <http://www.businesswire.com/portal/site/google/?ndmViewId=news_view&newsId=20090622005651&newsLang=en>
  • Indian Apparel exports fell by close to 10 per cent in April this fiscal and exporters expect an equally disappointing data for May of down 10% to 15% under impact of global downturn.  Garment exports from the country dropped to 10.75%. For May there are very few orders from the US and EU markets. Indian exporters face the double whammy of declining demand and competition from Vietnam, Cambodia and Bangladesh. "We are losing out our competitive edge to neighboring countries where exporters enjoy more incentives... they managed to have a greater presence in the western markets," Vaid added. <http://economictimes.indiatimes.com/Economy/Apparel-exports-slip-10-pc-in-April/articleshow/4683603.cms>
  • Fashion houses, designers and retailers are rushing into the free social media phenomenon that is reshaping not only interpersonal communication, but how apparel, accessories and beauty products are marketed and sold. They are tweeting, blogging and updating their profiles in an effort to mold their brand personalities on real-time global platforms and form relationships with a community of customers, particularly consumers for whom the Web is as important as a limb. <http://www.wwd.com/business-news/exec-search-firm-berglass-expands-program-to-e-commerce-2187064?navSection=business-news>
  • Payless ShoeSource, the retailer on a mission to democratize fashion in footwear and accessories byoffering the most in-demand styles at affordable prices, announced today its summer collection featuring the season's hottest trends. The line includes gladiator sandals, embellished wedges, nautical details and colorful canvas so everybody can have access to the latest looks - all at a great price. The retailer is currently stocking shelves with hot summer styles for on average under $20 an item, with many styles for under $15. ThePayless summer collection reflects the most current trends with a diverse array of silhouettes, colors, materials, and details to suit any
    outfit. With today's focus on stretching dollars, shoppers can update their wardrobes and snatch up even more of the latest fashions and still stay within their budgets. <http://www.prnewswire.com/cgi-bin/stories.pl?ACCT=APPSEAR.story&STORY=/www/story/06-22-2009/0005047988&EDATE=MON+Jun+22+2009,+11:07+AM>
  • At the Men's Wearhouse shareholder meeting, management announced that promotions like buy one, get one free that are driving business in the down economy, will remain because they believe the economy has not yet begun to recover. <http://www.wwd.com/business-news/exec-search-firm-berglass-expands-program-to-e-commerce-2187064?navSection=business-news>
  • The TJX Cos. Inc. will pay a $5.5 million settlement, $2.5 million to establish a data security fund and $1.8 million to cover the states' investigation costs over cyber theft in 41 states. The agreement puts an end to the states' investigations into the retailer's culpability in the massive security breach, through which hackers stole information on 45.7 million credit and debit cards from the company's computer systems during 2005 and 2006, TJX said.  <http://www.wwd.com/business-news/exec-search-firm-berglass-expands-program-to-e-commerce-2187064?navSection=business-news>
  • The Obama administration filed its first World Trade Organization case against China on Tuesday over export restraints on raw materials that it charges provide an unfair advantage to Chinese industries, while limiting access and raising costs for countries importing the goods. Although the materials covered by the complaint are not used in apparel or footwear making, textiles and leather could be the next step. The materials included in the complaint are mainly used in the production of steel, aluminum, and other chemical products: bauxite, coke, fluorspar, magnesium, manganese, silicon metal, silicon carbide, yellow phosphorus and zinc). The downstream products that incorporate the raw goods at issue cover a wide range of items, including textile laminates, cosmetics, flame retardants, fiber products, consumer electronics, automobiles and contact lenses. <http://www.wwd.com/business-news/exec-search-firm-berglass-expands-program-to-e-commerce-2187064?navSection=business-news>
  • The Organization for Economic Co-operation & Development forecast Tuesday that more than 57 million people will be unemployed in rich nations by the end of 2010, up nearly 20 million from 37.2 million at the end of 2008. The agency said the surge in the jobless numbers will bring the OECD unemployment average to around 9.9 percent, the highest since the Seventies, when it averaged 9.8 percent. Obama was on the tube yesterday saying that Unemployment will reach 10% in the US.  If you remember from the conference calls of Q4 08, companies like Macy's baked in their longer term estimates based on the assumption that unemployment in the US would be 9%.  We are now only a few bps from 10% unemployment. <http://www.wwd.com/business-news/exec-search-firm-berglass-expands-program-to-e-commerce-2187064?navSection=business-news>
  • AmericasMart officials hope a recent executive change and a renewed commitment to buyers' market experience will position the show for growth once the economy bounces back. In the meantime, officials are offering retailers more incentives to shop in Atlanta, including expanding the show to a fiveday, Thursday-to-Monday format, providing educational business seminars during market and offering additional show perks. Product callouts: In sportswear and dresses, immediates are selling best and there is a buzz in the accessories market. <http://www.wwd.com/retail-news/dallas-market-on-the-right-path-2186771?navSection=retail-news>
  • Having struggled with exhibitor exodus and dwindling buyer attendance over the last year, a toned-down ASR is starting to emerge, and organizers are taking aggressive measures to lure buyers and exhibitors alike. Tompkins said ASR's prices for the Sept. 10 to 12 show were reduced by about 25 percent over last September, and organizers are infusing new life to the show through a five-year licensing deal - valued between $1 million and $2 million - with Class trade show founder Jason Bates to bring his two-year-old concept to San Diego. Called Class@ASR, the idea is to bring fashion-forward, upscale brands to the mix, adding diversity to an exhibitor roster traditionally comprised of surf-skate stalwarts. The Class addition will target boutique buyers and some 100 contemporary labels, including Modern Amusement, Original Penguin and Howe. The show will take place in the San Diego Convention Center with ASR, but will be curated and organized separately. <http://www.wwd.com/retail-news/dallas-market-on-the-right-path-2186771?navSection=retail-news>
  • Organizers of international textile shows have already seen the poor economy cut into their exhibitor and attendance figures, but believe pent up demand and faint glimmers of optimism will lift their shows during the last half of the year. <http://www.wwd.com/retail-news/dallas-market-on-the-right-path-2186771?navSection=retail-news>
  • Father's Day Sales Better Than Expected -Promotional and last-minute. Those words described Father's Day business for retailers around the country last week. Even so, most stores were pleased with the way sales wound up and are optimistic the modest pickup they've been experiencing for the past several weeks will continue into fall and holiday. Casualwear, most notably colorful polos and woven sport shirts, were among the most popular items. And the catchphrase of the season is lean inventories. After getting burned last fall and holiday with an overabundance of goods, retailers have slashed their budgets and are now carrying the bare minimum in order to inch their margins back to acceptable levels. <http://www.wwd.com/retail-news/dallas-market-on-the-right-path-2186771?navSection=retail-news>
  • In an effort to reach more independent retailers nationwide, Nina Shoes has launched an Internet initiative catering exclusively to smaller specialty boutiques in the country's harder-to-reach regions. The wholesale portal, which launched in the spring and will make its debut at WSA in July, is targeted toward independent retailers in areas without local sales representatives and those that have difficulty attending trade shows. <http://www.wwd.com/footwear-news/nina-launches-wholesale-website-2186792?navSection=footwear-news>
  • A small sports-licensing company in Westwood, Mass. has sued Nike Inc. and the Naismith Memorial Basketball Hall of Fame Inc. for fraud and breach of contract over a proposed Nike line of Michael Jordan sportswear. SportsFuzion Inc. claims Nike and the Hall of Fame's plans for a "Air Jordan Hall of Fame" apparel collection circumvent a 2006 contract that it said gave SportsFuzion exclusive sportswear licensing rights to the Hall of Fame's trademarks and logos. <http://www.sportsonesource.com/>
  • U.K. online sales up 14% in last 12 months, London trade group reports - Online retail sales in the U.K. grew 14% from April 2008 to April 2009, the Interactive Media in Retail Group and technology and consulting company Capgemini report. U.K. consumers spent £43.8 billion (US $61.7 billion) online last year. <http://www.internetretailer.com/>
  • LVMH Moët Hennessy Louis Vuitton and Chicago-based Monastery Hill Bindery have ended their legal battle over the luxury house's Epi Leather trademark on hotel guest room binders sold to the Grand Hyatt that infringed on the Epi pattern, which is made up of two-tone wavy lines. Monastery Hill admitted no wrongdoing but entered into an injunction barring it from infringing upon the Epi trademark and will stop selling the product and destroy the remaining stock. <http://www.wwd.com/business-news/exec-search-firm-berglass-expands-program-to-e-commerce-2187064?navSection=business-news>
  •  French President Nicholas Sarkozy on Monday said the burka, the traditional Islamic garment worn by women that covers the face entirely, is unwelcome in France. The country's National Assembly on Tuesday said it has created a commission of 32 deputies to investigate whether women should be allowed to wear burkas. But, some worry that banning the garment could have a detrimental effect on French business. That could especially be the case for top-end hotels, many of which are owned or frequented by Arabs, and for bastions of the luxury trade. <http://www.wwd.com/business-news/exec-search-firm-berglass-expands-program-to-e-commerce-2187064?navSection=business-news>